Question

The return on plan assets component of a defined benefit pension plan expense is computed as...

  1. The return on plan assets component of a defined benefit pension plan expense is computed as the
    1. ending liability times the future earning rate of the plan.
    2. ending liability times the current earning rate of the plan.
    3. beginning liability times the assumed earning rate of the plan.
    4. beginning plan assets times the expected earning rate of the plan.

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Answer #1

Correct option is b)

Reason:

Under the defined benefits plan, the employees are guaranteed to a certain amount of benefits/payments in the future. Since pension payments are usually made much later in the future, there is a time difference between when employees receive future payments and when employees actually earn those benefits.

The pensions accounting for defined benefit plans requires following treatment:

Determining fair value of the assets and liabilities of the pension plan at the end of the year
Determination of the amount of pension expense for the year to be reported on the income statement
Value the net asset or liability position of the pension plan on fair value basis.

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